APPENDICES December Tools for Practitioners

Transcription

1 APPENDICES December Tools for Practitioners 1

2 APPENDIX 1 Examples of Sources of Relevant Data for Assessing Conditions in the Credit Markets 2

3 Economic Conditions Average annual rates: Source: Fed Funds 0.16% 0.18% 0.10% 0.14% 0.11% 0.09% 0.13% Federal Reserve Board Selected Interest Rates H day Non-Financial Commercial Pa 0.18% 0.18% 0.12% 0.13% 0.08% 0.07% 0.11% Federal Reserve Board Selected Interest Rates H day LIBOR 0.33% 0.27% 0.23% 0.24% 0.19% 0.16% 0.20% ICE Benchmark Administration Limited Prime Rate 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% Federal Reserve Board Selected Interest Rates H Year Treasury (nominal) 3.26% 3.22% 2.78% 1.80% 2.35% 2.54% 2.14% Federal Reserve Board Selected Interest Rates H.15 High Yield Bond 13.83% 8.34% 7.79% 7.05% 6.08% 5.79% 6.96% Merrill Lynch 30 Year Prime Home Mortgage 5.04% 4.69% 4.46% 3.66% 3.98% 4.17% 3.85% Federal Reserve Board Selected Interest Rates H.15 Consumer Price Index Bureau of Labor Statistics Commercial RE Cap Rate 9.70% 8.98% 8.78% 8.87% 8.13% 7.75% National Association of Realtors Key Macro Indicators: GDP Growth (2009 dollars) -2.80% 2.50% 1.60% 2.20% 1.50% 2.40% 2.40% Bureau of Economic Analysis % Increase over prior year Positive % 37.50% % 60.00% 0.00% Unemployment 9.3% 9.6% 8.9% 8.1% 7.4% 6.2% 5.3% Bureau of Labor Statistics % Increase over prior year 3.50% -7.03% -9.61% -8.67% % % Housing starts 554, , , , ,900 1,003,300 1,111,800 Census Bureau % Increase over prior year 5.94% 3.73% 28.22% 18.49% 8.48% 10.81% New car sales 5,400,890 5,635,432 6,089,403 7,243,654 7,780,710 7,918,601 7,740,912 Autodata Corporation % Increase over prior year 4.34% 8.06% 18.96% 7.41% 1.77% -2.24% Retail sales (in millions) 3,393,442 3,543,235 3,784,874 3,939,896 4,042,054 4,190,358 Census Bureau % Increase over prior year 4.41% 6.82% 4.10% 2.59% 3.67% New business formation (Entry rate) 9.1% 9.3% 9.7% 10.3% 10.2% Census Bureau % Increase over prior year 2.20% 4.30% 6.19% -0.97% Business bankruptcies 60,837 56,282 47,806 40,075 33,212 26,983 24,735 US Courts % Increase over prior year -7.49% % % % % -8.33% 3

4 Drilldown by Census Tract POLICYMAP: Examples of the range of data categories associated with policy-making decisions Incomes and Spending Housing Lending Economy Education Income Per Capita Family Household Poverty People in Poverty Persistent Poverty Federal Tax Returns Sources of Income Deductions Credits and Payments Taxes Filed, Taxes Paid Home Sales Sales and Sale Price Loan-to-Value Ratio Home Values Median Value Homes by Value Median Real Estate Tax Rents and Rental Units Median Rent Number of Units Fair Market Rents Housing Units Group Quarters Age of Home New Building Permits Mortgage Loans Home Purchase Loans "Piggyback" Home Purchase Loans Refinance Loans Prime Mortgages High-Cost Mortgages Government-Insured Loans Loan to Income "Leverage" Ratio Mortgage Loans By Race or By Race By Ethnicity Mortgage Loans By Income By Borrower Income By Tract Income Jobs & Industries (Local) All Jobs By Sector By Subsector Jobs & Industries (Metro/County) All Jobs and Wages By Subsector Small Business and Startups Small Business and Startups Large and Established Businesses Employment Unemployment Employment Labor Force Population School Enrollment Educational Attainment By Race School District Statistics Graduation Rate Student-Teacher Ratio Student Populations Revenues and Expenditures Federal Education Program 4

5 Key Data on the Banks that Define the Market (1) Commercial Banks with Assets Greater than $3 Billion (EOY) Earnings and Profitability Percent of Average Assets: Interest Income (TE) Interest Expense Net Interest Income (TE) Noninterest Income Noninterest Expense Provision: Loan & Lease Losses Pretax Operating Income (TE) Realized Gains/Losses Sec Pretax Net Operating Income (TE) Net Operating Income Adjusted Net Operating Income Net Inc Attrib to Min Ints Net Income Adjusted Sub $ Net Income Margin Analysis: Avg Earning Assets to Avg Assets Avg Int-Bearing Funds to Avg Assets Int Inc (TE) to Avg Earn Assets Int Expense to Avg Earn Assets Net Int Inc-TE to Avg Earn Assets Liquidity Net Non Core Fund Dep New $250M Net Loans & Leases to Assets Capitalization Tier One Leverage Capital Cash Dividends to Net Income Retained Earnings to Avg Total Equit

6 Key Data on the Banks that Define the Market (2) Commercial Banks with Assets Greater than $3 Billion (EOY) Growth Rates Total Assets Tier One Capital Net Loans & Leases Short Term Investments Short Term Non Core Funding Average Total Assets 6,744,940,461 7,531,338,722 8,366,510,342 9,419,492,066 9,660,121,198 9,631,860,126 9,997,715,097 10,668,789,465 11,099,607,468 11,827,707,942 12,587,032,977 Total Equity Capital 666,625, ,827, ,014, ,050,258 1,007,684,322 1,059,703,186 1,142,197,861 1,224,089,373 1,265,631,474 1,365,176,213 1,429,366,369 Net Income 83,728,807 92,099,239 66,149,081 3,088,010 14,612,209 61,638,174 82,441,902 99,660, ,870, ,014, ,289,604 Number of banks in Peer Group Percent of Average Assets Personnel Expense Occupancy Expense Other Oper Exp (Incl Intangibles) Total Overhead Expense Overhead Less Nonint Inc Other Income & Expense Ratios: Efficiency Ratio Avg Personnel Exp Per Empl ($000) Assets Per Employee ($Million)

7 APPENDIX 2 Standard Definitions, Terms, Calculations and Reporting for Evaluating Lender Portfolio Risk 7

8 Standard Terms in the Management of Risk (1) Quick Guide to Banking terms for evaluating loan quality, portfolio quality and risk management Loss Reserve The loss reserve is a deduction from the value of a loan's principal on the balance sheet. It reflects the uncertainty about loan repayment. The amount of the loss reserve is determined on a loan by loan basis and/or on a portfolio basis by management. Management uses a rating system based on prior experience to establish the appropriate amount to be set aside. Regulators routinely assess the adequacy of the reserves. Delinquency A loan is delinquent if it misses a scheduled payment. If a payment is delinquent then the whole loan is delinquent -- not just the payment. Lenders typically track delinquencies in day, day, day and 120+ day increments. Tracking the movement of loans through these cohorts is a critical part of evaluating the quality of risk management. Default Federal agency programs that guarantee loans made by private sector lenders use the term "default" to indicate a loan has been purchased from the lending partner or on which a claim has been paid. Modifications and Restructures Modifications are made by the lender when it appears that the borrower cannot or will not pay principal and interest under the original terms of the transaction. This is very common in small business lending, less common in corporate lending and project finance, and much less common among home mortgages. It is necessary. But it is a slippery slope. Lenders -- private or public, non-profit or for-profit -- often use modifications and restructures as a way to conceal the actual condition of borrowers and the magnitude of the risk in their portfolios. Non-Accrual Most lenders stop accruing interest on a loan, that is, booking interest revenue when a loan is past due 90 days. Some lenders wait until 120 days. 8

9 Standard Terms in the Management of Risk (2) Quick Guide to Banking terms for evaluating loan quality, portfolio quality and risk management Classified Loans The FDIC uses 5 classifications for evaluating loans when it reviews a regulated lender's portfolio: Pass, Other Loans Especially Mentioned (OLEM), Substandard (SS), Doubtful (D), and Loss (L). there is considerable discretion in making these ratings, but essentially they are: OLEM -- strong indications of weakness with likely delinquency and incapacity to pay; SS -- actual delinquencies and likely loss of interest and principal; D -- loss of interest and substantial principal; and L - loss of interest and most principal. Loans that are rated SS, D, or L are called adversely classified loans and generally require the lender to charge-off 25% (SS), 50%(D) or 100%(L) -- or proportional amounts - of principal on the loan. Impaired Loans Generally an internal designation by the lender's management, these are loans that would typically be classified as Doubtful or Loss. Charge-offs This is the amount that management loses each year on the loans that have gone bad. It is a non-cash item that rarely shows up on the financials. It represents the amount of principal that is lost on a loan -- which on unsecured small business loans can often be in the % range. Provision for Losses This is a non-cash expense that management uses to cover Charge-offs and build the Loss Reserve. It is deducted on the Operating Statement and reduces profits. It should be significantly greater than the Charge-offs: 1.5x is a good rule of thumb. Lenders in trouble often understate the Provision. Recoveries Recoveries represent the amount of cash the lender gets back after charging something off. Different loan types have different types of recovery -- home mortgages are higher, for example, and small business loans are lower. The % or recoveries to charge-offs is a critical indicator. A lender with a high ratio (for the asset class) is generally a prudent and disciplined manager of risk, and vice versa. 9

10 Example of Key Terms for Delinquency and the Establishment of Loss Reserves Total Loans $100,000,000 Aging Schedule Delinquent Days Delinquent Delinquent Delinquent Modifications Dollar Value $5,000,000 $575,000 $325,000 $750,000 $1,250,000 Percentage to Total Loa 5.00% 0.58% 0.33% 0.75% 1.25% Loss Progression Beginning Loss Reserve Provision for Losses Gross Charge-offs Recoveries Ending Loss Reserve $2,000,000 $600,000 $500,000 $200,000 $2,300, % 0.60% 0.50% 0.20% 2.30% 10

11 Accounting Entries for Lender Loss Reserves We fully charge-off a $1mm loan We make a provision for losses of $1.5mm to cover the loan plus We recover $200,000 on the bad loan by crediting the Loss We put the recovery back in our cash account by crediting Cash $10,000,000 Deposits $98,000,000 $200,000 $6,000,000 $16,200,000 $98,000,000 Loans $100,000,000 Equity $7,000,000 $200,000 $1,000,000 $200,000 $1,500,000 $6,000,000 $99,000,000 $11,500,000 Loss Reserve (Allowance for Losses) $5,000,000 $1,000,000 $1,500,000 $200,000 $5,700,000 Beginning Assets $105,000,000 Beginning Liabilities and Equity $105,000,000 Ending Assets $109,500,000 EndingLiabilities and Equity $109,500,000 11

12 A-129: Example of Good Portfolio Risk Reporting QUARTERLY PORTFOLIO ANALYSIS Loan Activity Dollar # or % Dollar # or % Dollar # or % Dollar # or % Loans Outstanding $ # Loans Approved $ # Loans Disbursed $ # Loan Principal Repayments $ % to $ volume Revenue Interest Revenue $ % to Loans Fee Revenue (Origination, application, other) $ % to Loans Other Loan Related Revenue $ % to Loans Operating Expenses Administrative Staff $ # Lending Staff $ # Servicing Staff $ # Program Staff $ # Professional Services $ # Other Expenses $ # Production Number of Applications Processed per Lender $ # Number of Renewals Processed per Servicer $ # Number of Amendments Processed per Lender $ # Number of Loans in Workout per Servicer $ # THIS MONTH YEAR TO DATE ANNUAL BUDGET YTD PRIOR YEAR 12

13 A-129: Example of Good Portfolio Risk Reporting Asset Management Dollar # or % Dollar # or % Dollar # or % Dollar # or % Total Delinquencies outstanding $ % to Loans Delinquencies this period $ % to Loans Defaults this period $ % to Loans days past due $ % to Loans days past due $ % to Loans 90 days + past due $ % to Loans 120 days + past due $ % to Loans Modified or Restructured Loans $ % to Loans Loans in Workout $ % to Loans Other Real Estate Owned $ % to Loans Default within 180 days of origination $ % to Volume Provision for Losses $ % to Loss Res Charge-offs $ % to Provision Recoveries $ % to Charge-off 13

14 APPENDIX 3 Strategies and Tools for Tracking and Managing Operating Costs 14

15 Analyzing the Five Staff Functions Involved in the Extension of Credit 1. Marketing Message What it is. Why you need it. Why us? Medium The full range of communications: signage, billboards, media, personal networks, social networks Location International, national, state, local, community 2. Origination Advisory Interface with the client that ends in a "go" or "no-go" decision Application The commitment of time in assisting the borrower and ensuring the information is complete Due diligence Vetting the data submitted by the applicant, obtaining data from relevant sources Credit analysis Evaluating the borrower data, assessing feasibility and the capacity to pay, structuring the transaction Approval Approving the transaction in line with the standards, authorities, and procedures of the institution Documentation Assembling complete and consistent documents of the agreement, obtaining signatures Closing Funding the loan or the grant; commiting the credit of the institution 3. Servicing Billing /collections Calculating the proper amounts of principal and interest due, invoicing and collection payments Customer service Questions about the transaction, institutional policies and procedures, the client relationship 4. Monitoring Loan payments Tracking how much of what is being paid and when, relative to the agreement is the first and most important indicator Borrower Performing routine due diligence, through contact and available data on the client is key to anticipating risk Lender Performing portfolio reviews, and where pertinent, field audits of lending partners, implementing remedial steps Service provider Performing work and contract reviews, implementing remedial steps 5. Default Maturity Deferral, modification, rewrites: altering the credit to suit the borrower's needs Termination Payment and/or payment capacity is sufficiently impaired to warrant termination of the agreement Liquidation/Sale The loan and/or assets securing the loan are sold 15

16 Calculating Operating Costs by Function The information we get that is misleading Operating Expenses $29,081,000 $ Loan Volume this $175,000,000 # Loan Volume this 500 Average Size of Loan $350,000 Number of Loans In 3,000 Loans Outstanding $1,050,000,000 PROBLEM: Cost to $34, % Cos $3, % Bottom-up analysis of what the true cost is Total # of Staff Number of Loans Handled Total Direct FTE Cost FTE Cost per Unit Unit Cost Indirect Staff and Resources Administrative Allocation Loans per Marketing FTE 2 2,000 $250,000 $ % $750,000 $300,000 Loans per Originating FTE 60 1,000 $5,920,000 $5, % $2,250,000 $2,451,000 Loans per Servicing FTE 40 3,000 $3,600,000 $1, % $6,000,000 $2,880,000 Loans per Monitoring FTE 10 3,000 $750,000 $ % $1,200,000 $585,000 Loans per Default Remediation FTE $750,000 $2, % $900,000 $495, ,300 $11,270,000 WHAT??? 2.86% $11,100,000 $6,711,000 Check Benchmarks Check Benchmarks 16

17 Forecasting Costs in Line with Loan Volume (1) # FTEs Marketing Origination Underwriting Closing Servicing Monitoring Default Management Administration Total FTEs Annual inflation rate for operating costs 2.00% STAFFING COSTS Marketing 70,000 71,400 72,828 74,285 75,770 77,286 78,831 80,408 82,016 83,656 Origination Underwriting 170, , , , , , , , , ,166 Closing Servicing 50,000 51,000 52,020 53,060 54,122 55,204 56,308 57,434 58,583 59,755 Monitoring 225, , , , , , , , , ,896 Remediation 160, , , , , , , , , ,215 Administration 225, , , , , , , , , ,896 Total staff costs 900, , , , , ,673 1,013,546 1,033,817 1,054,493 1,075,583 17

18 Forecasting Costs in Line with Loan Volume (2) NON-STAFF OPERATING COSTS NONSTAFF OPERATING COSTS Marketing 100, , , , , , , , , ,509 Origination Underwriting 160, , , , , , , , , ,215 Closing Servicing 35,000 35,700 36,414 37,142 37,885 38,643 39,416 40,204 41,008 41,828 Monitoring 135, , , , , , , , , ,337 Default Management 45,000 45,900 46,818 47,754 48,709 49,684 50,677 51,691 52,725 53,779 Administration 100, , , , , , , , , ,509 Total nonstaff operating costs 575, , , , , , , , , , Total Operating Costs per year 1,475,000 1,504,500 1,534,590 1,565,282 1,596,587 1,628,519 1,661,090 1,694,311 1,728,198 1,762,762 STAFF PRODUCTIVITY AND STAFF STRESS BENCHMARKS Opex as % of Principal O/S No agency loanno agency loanno agency loanno agency loanno agency loanno agency loanno agency loanno agency loanno agency loanno agency loans Originations per FTE No FTEs No FTEs No FTEs No FTEs No FTEs No FTEs No FTEs No FTEs No FTEs No FTEs Applications per underwriting FTE , ,250 1,250 1,313 1, ,188 Originations per closing FTE No FTEs No FTEs No FTEs No FTEs No FTEs No FTEs No FTEs No FTEs No FTEs No FTEs Active loans per servicing FTE 496 1,977 6,907 7,113 11,926 16,596 14,229 16,446 13,802 15,696 Annual servicing cost per active loan $ $43.86 $12.80 $6.34 $3.86 $2.83 $2.24 $1.98 $1.80 $

19 Expanding on A-129: Key Operating Data Points (1) This Month Year to Date YTD Prior Year Annual Budget Annual Prior Year Annual 2nd Prior Year Volume Dollar # or % Dollar # or % Dollar # or % Dollar # or % Dollar # or % Dollar # or % Loans Originated New Customers Percentage Increase (Decrease) vs prior period Existing Customers Percentage Increase (Decrease) vs prior period Total Approvals Percentage Increase (Decrease) vs prior period New Applications Declined Renewals Declined Processing New Customer Applications Submitted Approvals of New Applications Percentage to Total New Applications Closings Percentage to total Applications New Applications in process Percentage to total New Applications Renewals Percentage to total Loan Approvals Renewals Scheduled for Next Period Loan Approvals outstanding Percentage Increase (Decrease) Disbursements outstanding Percentage Increase (Decrease) Amendment/Waiver Amended Loans Outstanding Percentage to total loans outstanding 19

20 Expanding on A-129: Key Operating Data Points (2) THIS MONTH YEAR TO DATE YTD PRIOR YEAR ANNUAL BUDGET ANNUAL PRIOR YEAR ANNUAL 2ND PRIOR YEAR Staff Dollar # or % Dollar # or % Dollar # or % Dollar # or % Dollar # or % Dollar # or % Total Op Expenses / Number of Operating Staff Credit Providing FTE (Origination, etc.) Credit Managing FTE (Servicing, monitoring, etc.) Number of Applications Processed per Providing FTE Number of Renewals Processed per Providing FTE Number of Amendments Processed per Managing FTE Number of Loans in Workout per Managing FTE Operating Services provided by 3rd Parties 3rd Party cost per loan originated 3rd Party cost per loan underwritten 3rd Party cost per loan serviced Other 3rd Party costs to total loans Backlog Beginning Applications on Hand Applications Submitted Applications Approved Applications Declined Commitments Made Ending Applications on Hand Percentage Increase (Decrease) over prior period 20

21 APPENDIX 4 Comprehending and Managing Lending Partners 21

22 Lender Selection and Negotiation (1): Key Lender Indicators Profitability Ratios Key Financial Indicators for the Major Lenders in the Conventional Market Large Bank Small Bank Credit Union Finance Company Online Lender Credit Card Company CDFI Nonprofit Lender State HFA Gross Income (Revenues) to Assets 5.00% 4.47% 3.40% 7.57% 19.95% 22.56% 31.90% 6.01% Interest Expense to Assets 0.24% 0.28% 0.68% 2.27% 2.17% 1.07% 0.98% 2.85% Operating Expense to Assets 2.91% 2.33% 2.08% 3.67% 10.16% 14.55% 23.52% 2.00% Loss Expense to Assets 0.08% 0.27% 0.09% 0.21% 8.51% 1.28% 2.85% 0.05% Total Expenses 3.23% 2.88% 2.85% 6.15% 20.84% 16.91% 27.35% 4.89% Net Profit After Tax to Assets 1.37% 1.85% 0.58% 1.42% -2.36% 3.70% 7.50% 1.00% Ratio of Capital to Assets 10.98% 14.00% 8.41% 18.93% 39.20% 12.99% 41.03% 20.96^% Return on Equity/Subsidy 12.45% 13.22% 6.89% 7.51% -6.02% 28.47% 18.28% 4.77% Delinquency Rate 3.84% 1.14% 1.20% 0.16% 13.18% 1.87% 1.79% 0.34% 22

23 Lender Selection and Negotiation (2): Key Lender Indicators Trend Line Analysis Commercial Banks with Assets Greater than $3 Billion (EOY) Number of banks in Peer Group Average Total Assets of Peer Group (000's) 7,531,338,722 8,366,510,342 9,419,492,066 9,660,121,198 9,631,860,126 9,997,715,097 10,668,789,465 11,099,607,468 Growth Rates (End of Year) Total Assets Percent of Average Assets: Interest Revenue Total Overhead Expense Provision: Loan & Lease Losses Net Income Net Loans & Leases to Assets

24 Lender Selection and Negotiation (3): Profit, Liquidity, Flexibility The ROE Equation A top priority in most businesses is the Return on Equity. It is a particular focus in the lending business where the competition is intense, regulation is high and the margins are thin. Minor policy or product changes can have a major impact on the bottom line and the returns to shareholders. One of the most important indicators is the Asset Turnover Ratio ROE = LEVERAGE X PROFITABILITY X ASSET TURNOVER THE ROE THE THREE RATIOS LEVERAGE PROFITABILITY ASSET TURNOVER Net Profit Total Assets Net Profit Revenues = X X Net Worth Net Worth Revenues Total Assets All for-profits must focus first and foremost on the Return On Equity equation. Their investors require it. There are three main ways to increase the Return on Equity: (i) increase leverage; (ii) increase profit margins; and (iii) increase the speed of asset turnover. Because regulated depositories are constrained by capital requirements, they can only go so far in increasing leverage. Because lending is a highly competitive -- as well as largely regulated -- market, banks also have difficulty boosting profitability: when one bank innovates, cuts costs, or takes higher credit risk to boost near term ROE, the others tend to follow suit quickly. Increasing the speed of asset turnover is the easiest option, and tends to have the highest impact. It was one of the drivers of the 2008 debt crisis. A good way to use this ratio is to turn it into a true Asset Turnover ratio: divide Total Assets by Revenues. The result can be used to estimate the number of years that the assets must stay on the balance sheet in order to generate an equal amount of revenue. The longer the stay, the lower the ROE; and the shorter the stay, the higher the ROE (all things being equal). ROE LEVERAGE PROFITABILITY ASSET TURNOVER Large Bank 12.45% % 2.57% Small Bank 13.22% % 4.47% Credit Union 6.89% % 3.40% Finance Company 7.51% % 7.57% Online Lender -6.02% % 19.95% Credit Card Company 28.47% % 22.56% Non-Profit 18.28% % 31.90% State Housing Finance Agency 4.77% % 6.01% 24

25 Lender Selection and Negotiation (4): Key Performance and Cash Flow Indicators Rudimentary Assessment of the Viability of the Product/Program Forecast Year year totals New loan volume $ 125,000, ,000,000 1,250,000,000 1,875,000,000 2,500,000,000 2,500,000,000 2,625,000,000 2,000,000,000 1,875,000,000 2,375,000,000 17,500,000,000 New loan volume # 500 1,500 5,000 7,500 10,000 10,000 10,500 8,000 7,500 9,500 70,000 Gross Loans Outstanding $ 117,634, ,396,819 1,585,969,888 3,177,350,101 5,163,620,352 6,884,293,103 8,452,193,111 9,152,993,148 9,530,501,486 10,206,186,386 Loans Oustanding # 496 1,977 6,907 14,226 23,852 33,191 42,686 49,338 55,208 62,784 Principal repayments 6,793,390 31,500, ,333, ,071, ,777, ,767, ,683,329 1,170,682,769 1,356,641,792 1,552,531,147 6,611,784,006 Interest income 3,020,588 14,099,948 52,211, ,231, ,682, ,866, ,365, ,861, ,274, ,340,601 2,673,955,297 Fee Income: Origination 2,500,000 7,500,000 25,000,000 37,500,000 50,000,000 50,000,000 52,500,000 40,000,000 37,500,000 47,500, ,000,000 Servicing Other Up Front 1,250,000 3,750,000 12,500,000 18,750,000 25,000,000 25,000,000 26,250,000 20,000,000 18,750,000 23,750, ,000,000 Other Ongoing Charge-offs 572,147 2,736,762 10,093,354 24,548,191 46,952,052 75,559, ,416, ,517, ,849, ,783, ,029,608 Recoveries 14,255 87, , ,838 1,864,655 3,168,949 4,632,315 5,924,030 6,728,151 5,307,540 28,976,995 Guarantee payments from lenders - 544,071 2,602,468 9,598,070 23,343,604 44,648,101 71,851, ,243, ,210, ,938, ,980,996 Net credit losses 557,892 2,105,289 7,156,024 14,035,283 21,743,793 27,742,372 28,932,649 22,349,325 11,910,902 7,538, ,071,616 Interest Expense 2,058,603 9,167,936 35,684,322 79,433, ,999, ,528, ,696, ,354, ,393, ,247,455 1,835,565,265 Lender operating expenses as a % of assets 0% 0% 0% 0% 0% 0% 0% 0% 0% Operating costs Total Profitability 4,154,093 14,076,723 46,871,546 83,012, ,938, ,595, ,486, ,157, ,219, ,805,059 1,219,318,416 25

26 Lender Negotiation: Loan Pricing The cost of the loan on a per loan basis (unit cost) is one of the key tools that banks use to determine whether or not to lend to a borrower segment. Agencies can use it in the same way the bank uses it: to determine the true cost and what a sustainable interest rate would be. We show how, using a small business loan of $500,000 to a 5 year old battery recycling business in the Bronx, "BRB", the Agency can iterate the level of support the finance company will need to lend in this market. While not conclusive, this "back of the napkin" kind of analysis can help the agency perform two critical functions: (i) identify the financial metrics that indicate the credit gap and provide indicators of how to structure the federal product solution; and (ii) identify what financial goals must be achieved before the target constituency is ready to be guided back to a private sector solution. FINCO UNIT COST Business Loan Assets $47,880,000 $500,000 Loan Revenues to Assets 7.57% 10.50% Interest Expense to Assets 2.22% 2.22% Operating Expense to Assets 3.67% 4.00% Loss Expense to Assets 0.21% 1.72% Total Expenses 6.10% 7.94% Net Profit After Tax to Assets 2.36% 2.56% Total FINCO Equity $9,063,000 $9,063,000 Capital to Assets 18.93% $94,643 Return on Equity 12.47% 13.55% In order to cover the additional risk, the interest rate must be increased This cost is the same for all products at the bank The $500k loan is smaller than the Finco's avg loan, so the op cost is higher This is the loss rate for loans with a 200 SBA credit score The ROE on this loan type is higher than the existing ROE so the lender has a motivation to participate. In this example, the BRB small business loan segment might be attractive to the bank if the interest rate is raised at least to 10.0%. That is to allow for the uncertainties associated with going into a new credit segment, plus an underlying goal of generating a higher ROE than that which the lender is currently generating. But the lender will want to be sure that this higher rate is low enough to be: (a) affordable for the borrower; and (b) competitive with other lenders. The issue of competitiveness is critical: banks do not generally gravitate to "one-off" deals because of the higher cost to do them. 26

27 Lender Negotiation: Example of Allocation of Financial Benefits for Ex-Im Global Express Comparative Agency Revenues and Expenses (First Year) Loan Size $ 500,000 AGENCY Existing Program Global Credit Express Interest 0.00% $0 4.00% $20,000 Fees 0.75% $3, % $12,500 Total Revenues $3,750 $32,500 Interest Expense $0 $0 Operating Expense 0.90% $4, % $3,750 Loss Expense 1.25% $0 2.50% $12,500 Total Costs $4,500 $16,250 Agency Net Revenues 1st Year ($750) $16,250 Comparative Lender Revenues and Expenses (First Year) Loan Size $ 500,000 LENDING PARTNER Existing Program Global Credit Express Interest 4.25% $21, % $ - Fees 0.75% $3,750 flat $2,500 Total Revenues $25,000 $2,500 Interest Expense 0.28% $1, % $0 Operating Expense 3.00% $15, % $250 Loss Expense (10% unguaranteed) 1.25% $0 0.00% $0 Total Costs $16,400 $250 Lender Net Revenues 1st Year $8,600 $2,250 ROA 1.72% Infinite ROE 12.29% Infinite Comparative Borrower Costs (First Year) Loan Size $ 500,000 BORROWER Actual Interest Expense Existing Program $21,250 Global Credit Express $20,000 Actual Fee Expense $7,500 $15,000 Total Costs $28,750 $35,000 Borrower Net Cost $28,750 $35, Borrower's Alternative Credit Card Alternative Interest 16% $80,000 Alternative Fees $75 $75 Total Alternative Borrower Cost $80,075 BENEFIT $45,075

28 Lender Negotiation: Example of the Allocation of Financial Benefits for SBA 7a Agency Loan Size $ 500,000 Regular Bank Loan SBA Guaranteed Loan Interes t $0 Fees 75% 3.00% $11,250 Total Revenues $0 $11,250 Interes t Expens e 0.00% $0 Opera ting Expens e $4,500 Los s Expens e (75% gua ra ntee) 75% 3.00% $11,250 Total Cos ts $0 $15,750 Agency net revenues $0 ($4,500) Intermediary Interes t 6.00% $30, % $30,000 Fees 2.00% $10, % $11,250 Total Revenues $40,000 $41,250 Interes t Expens e 0.28% $1, % $1,400 Opera ting Expens e 0.75% $3, % $6,250 Los s Expens e (25% ungua ra nteed) 25% 2.00% $10, % $2,500 Other (Fee to SBA) $11,250 Total Cos ts $15,150 $21,400 Intermedi a ry net opera ting revenues $24,850 $19,850 ROA 4.97% 3.97% ROE 35.50% 28.36% This doesn't look so good - at least in the first year -- due to the one time fees to the SBA which exceed the expected loss rate. In subsequent years, however, the SBA deal looks better: ROE of 28.37% for the SBA options versus 21.22% for the regular bank option. And that is before the sale of the guarantee below.

29 SBA 7a Calculation (Continued) Intermediary Sells the 75% SBA Guaranteed Portion of the Loan Gain/(Loss) on Sale of Gty 110.0% $0 $37,500 Intermediary net revenues $24,850 $57,350 ROA 4.97% 11.47% ROE 35.50% 81.93% Borrower Regular Bank Loan Actual Interest Expense $30,000 $30,000 Actual Fee Expense $10,000 $11,250 Total Costs $40,000 $41,250 Borrower Net Cost $40,000 $41,250 Credit Card Alternative Interest 16% $80,000 Alternative Fees $75 $75 Total Alternative Cost $80,075 SBA 7a 29

30 System of Graduated Remedies for a Small Nondepository Program Participant in Export Finance (1) I. SEGMENTATION OF A SMALL NON-DEPOSITORY LENDER Current Status Years Years undewriting product line < to 10 2 > 10 3 Revenues Total revenues < $1 mm 0 $1-5mm 1 > 5mm 2 Net Worth Net Assets < $200m -1 $200m-2mm 2 > 2mm 3 Leverage Total Liabilities to Net Assets > to 4 1 < 4 2 Efficiency Operating Expenses to total Assets > 10% -1 10% to 6% 2 < 6% 3 Cost of Funds Interest Expense to total Assets > LIBOR LIBOR < LIBOR +1 3 Delinquencies Defaulted loans to total loans > 8% -1 8%-4% 2 < 4% 3 Credit Losses Credit losses to total loans > 5% 0 5%-3% 1 < 3% 2 Recoveries Recovery to defaulted principal < 10% 0 10% to 20% 1 > 20% 2 Liquidity Loan Repayments to New Loans Made < 25% -1 25%-66% 2 < 66% 3 Total Loans o/s to Loan Repayments > To 2 1 < 2 2 Early Warnings Growth Number of deals this year vs previous year > 150% % 2 < 120% 3 Deal Size Largest deal to last year's average deal size > 150% % 1 < 120% 2 Deal Flow Number of deals Per Year < to 10 1 > 10 2 Staffing Number of total deals to total staff > to 50 2 < 50 3 Policy Changes Urgent and/or repeated requests for changes in policy terms > 10% to 5% 2 < 5% 3 of volume of volume of volume Claims Experience Claims due to poor underwriting >120% ofaverage % of Avg 2 < 80% of Avg 8 Claims due to fraud, carelessness Totals for Categorizing Non-Depository Small Lenders Yr Trend (Comparative) ROE Asset Leverage Total Assets over Net Assets Return on Sales Net Income to Total Revenues Asset Turnover Total Revenues divided by Total Assets ROE Asset Leverage X ROS X Asset Turnover

31 System of Graduated Remedies for a Small Non- Depository Program Participant in Export Finance (2) II. LEVEL OF AGENCY MONITORING BASED ON LENDER RISK ASSESSMENT Protocols < to 32 > 32 Standard Review Review of lending activity: volume Qrtr Annual Annual Quality of lending performance Qrtr Annual Annual Review Audit/Taxes of Lender Annual Two Years Three Years Borrower credit scores and data 100% 100% 100% Credit Portfolio Management Review 100% 100% 100% Credit Audit Performed by Agency Annual Three Years 0 Borrower Samples 10% 2% 0% Years for lender trend line analysis Field Audit Performed by Agency: Annual Three Years Adverse Event Analysis of Transaction Documents 10% 5% 5% Due diligence on buyers, shipments, UCC filings 10% 5% 5% Procedures Credit PF Mgmt Segment lender's exposure by type and concentration of risk: type of borrowers, size, location, credit history, NAICs, country of destination, etc. Capture trends in lending by portfolio segment Forecast activity and level of risk to the portfolio by segment Compare with activity of other lenders Field Audit Review files, documents (Purchase Order, Invoice, Bill of Lading, Payment Instructions) for accuracy and completeness on designated sample Perform due diligence on vendors, buyers, rshipments, receivables, UCC filings Evaluate Lender's processes for origination, underwriting, billing, collections, maintaining records, litigation, management depth, finance experience, staff, turnover, governance, IT, reporting Reconcile lending activity reports with audit and GL Credit Audit 31 Review lender's credit files on designated sample of borrowers: financial data, financial status, credit bureau, credit score, liabilities, pledged collateral, receivables aging, inventory levels, major cash flow items and changes in product line, destinations and/or patterns of shipping Analyze lender's performance over the most recent 3-5 year period to include: product summary, evaluation of changes in product line, ROE analysis, cash flow analysis, evaluation of credit lines, collateral, capital, liquidity, asset quality and role and nature of equity holders.

32 Graduated System of Remedies for Small Non-depository Program Participant in Export Finance(3) III. EVALUATION TRIGGERS AND REMEDIES Adverse Events Lender Rating Agency Response 20% Change In Lender financial status: Net Assets (line 3) Efficiency (line 5) Cost of Funds (line 6) Delinquency (line 7) Liquidity (line 10) Rate of Growth (line 11) Staffing (line 14) Policy Changes (line 15) Accelerate Credit Audit Accelerate Standard Review Accelerate Standard Review Fail Credit Audit or Review Negatives in Section 1 (above) or other items found during Review Accelerate Field Audit Accelerate Credit Audit Accelerate Credit Audit 20% Change Number of Lender Claims due to excessive Credit Risk (line 16) Accelerate Field Audit Accelerate Credit Audit Accelerate Credit Audit 20% Change Number of Lender Claims due to Fraud (line 17) Cease New Lending Pending Field Audit Cease New Lending Pending Field Audit Cease New Lending Pending Field Audit IV. GRADUATED REMEDIES IN THE EVENT OF UNSATISFACTORY REVIEWS/AUDITS Credit Limits Reduce the size of the credit limits for the errant borrowers of the lender Restrict the credit scores of participating exporters Reduce the size of the credit limits for the lender Limit the countries of destination Volume Limit number of deals Limit deal size Delegated Authority Cease delegated authority 32 Pricing Terminate participation Charge lender higher fees for use of the program For the earlier of 6 months or cure of problems with the program